Thursday, November 25, 2010

A region stalled - is consumption the problem?

So what makes Auckland tick?

For some time Auckland has been seen as a problem economy.

To find out why I looked at some 20 studies of Auckland’s economy prepared between 2004 and 2010.They were pretty repetitive, some just building on what others had already said.The following themes pretty well cover the analyses and prognoses they offered:

(1)Too much has been invested in consumption-focused activity and not enough in export industries;

(3)There is a need to keep costs low to attract investment and maintain competitiveness;

(4)Good connectivity (transport and communications) is needed to enable firms to work together well and to do international business effectively;

(5)As a high density urban area Auckland should be able to make productivity gains, lower costs, and lift connectivity;

(6)An attractive living environment will attract and keep the people needed to make things happen.

A high density city is not the answer

In previous postings I pointed out that in employment terms Auckland has lagged over the past decade, with the rest of New Zealand growing slightly faster.Actually Auckland led the way after 2007 – but in the wrong direction. Auckland's employment fell by 2.8% and the rest of New Zealand by 1.6%.

Not only that, but when we review individual sectors it appears that concentration in Auckland was more likely to be a disadvantage than an advantage.

That finding seems to knock out theme number (5) in the list above, that there are automatically advantages in the concentration of firms and in a larger, higher density environment. Maybe there are some gains to firms in a sector clustered in the region. Perhaps the density of activity in Auckland offers “urbanisation advantages” – more opportunities to conduct exchange at lower costs. But if so, these things do not show up in aggregate performance.

So, theoretical agglomeration economies must be offset by actual diseconomies -- the reality of the high cost of investing and operating in Auckland. With the government pinning its hopes for economic recovery on the performance on the region, this has got to be a worry.

We need to look again at how to explain Auckland’s performance, and how we might promote it. In this posting I make a start by considering changes in economic structure, item number (1).

The wrong structure?

If over-dependence on consumption has been the problem, this will show up in the changing mix of activities in the region.

To explore this I grouped employment into major sectors in the table below and looked at each sector's growth over the decade, in two parts. The first seven years saw almost unparalleled growth internationally. The last three years were sent reeling by the Global Financial Crisis (GFC).

The numbers come from the Statistics New Zealand February employment counts. They tell an interesting story.

Production of goods on the downward slope

First, manufacturing was definitely on the soft side for the first seven years. This set it up for an outright tumble with the onset of the GFC. When we look at the detail, only the food and beverage sectors made any significant progress at all over the whole period. Machinery and equipment manufacturing just held its ground.But the whole lot contracted – even these favoured subsectors – from 2007 to 2009.

The other "industrial" activities – transport and storage, construction, and utilities – fared better early on, but joined the tumble in later.

Business services hit the wall

Second, the big player in the first part of the decade – business and support services, which grew by 37% in seven years – also hit the wall in the second part, giving back 15% of the job gain .Not surprisingly, financial, administrative and real estate services took the biggest hit. Overall, this sector accounted for a third of the region’s gain between 2000 and 2007 and then a third of its loss between 2007 and 2010.

Consumer services stall

Third, consumer-oriented services – retailing, accommodation, cafes, bars and restaurants – were certainly significant, but they still accounted for only 19% of Auckland’s total employment in 2010. And given that the region’s population grew by around 22% over the decade, a final gain of 16% in these activities (following a decline late in the piece) does not seem out of line. Cultural, recreation and personal services did grow faster than population, but are much less significant overall. They accounted for just 6% of regional employment in 2010.

Of course, a large share of employment in the industrial and business service sectors also depends on household demand but then those sectors – especially the industrial sector – grew only modestly in any case. On the face of it, over-consumption has not been the problem - but under-production may have been. (I have not looked at the housing sector here, though. That needs separate analysis).

Public services rumble onward and upward

Fourth, and most significantly, the public services sector – hospitals and health, education, law and order, social assistance, and government administration – had by far the most growth. It was the only major sector to grow after 2007. By 2010 public services accounted for over 23% of Auckland’s employment.

It can be expected that this is related to an expanding population . Interestingly, though, 45% growth in public services employment is over double population growth of 22%.

Actually, on this score Auckland’s ratios do not stack up quite as badly as elsewhere.Over the rest of New Zealand public services grew by 27%, three times the rate of population at 9%.

Not surprisingly, Wellington led the way.With 10% population growth between 2000 and 2010 it experienced 35% growth in employment in public services, including a spectacular 53% gain in public administration.

This raises some hard questions. Has demand for public services grown by that much?Have any productivity gains been made in public services?And given that it was the only sector to actually grow during the GFC, where might recovery come from, other than from services funded primarily by current and, increasingly, future taxpayers?

So what is the prognosis?

Final demand – consumption – indeed dominated Auckland’s growth over the past decade, but only when we lump public servcies in with the traditional markers – retailing, catering, and entertainment.The real issues this analysis raises are:

The production of goods and services – industry – has completely underperformed. We really do need to focus on how we can turn this around.

The main growth sector, business services, is now looking shaky. Let's hope that some sound performers survive and emerge from the current shakedown of a sector that maybe just got too big for its boots.

The GFC has revealed an unhealthy overdependence on public services. THere is a need to address productivityn issues here, including the quality of decision-making and resource allocation throughout the public sector.

So crowding out of productive investment and employment by a focus on consumption my not have been the issue. Rather, a failure to grow our income earning sectors and consequent reliace on an explding public services sector is a concern, one that simply chopping the number of civil servants in local government may not resolve.

It’s not that the expansion of public services is a bad thing if it contributes to the well-being of the community and lifts economic productivity.But the fact that it has been the only source of significant employment growth over the last three years suggests a weakness in the private sector and signals a region still over-dependent on taking in its own washing to sustain itself – or, if we want to mix metaphors, bootstrapping without the boots.